Sunday, August 19, 2012

Blast from the past with EE-series government savings bonds

Hi again, and apologies for the unplanned hiatus. Rest assured I've been making steady progress on my financial goals even if I've not been reporting back.

I came into some money since my last post. My mom handed over a stack of savings bonds, 40 in total, that she'd been holding for me almost since I was born.

Series EE bonds are pretty cool — or, they were pretty cool. The idea is that you buy them for half of their face value, and over some set period of years they'll double in value. Actually, now that I'm looking into this, that's the way it used to be. Here is the TreasuryDirect website for series EE bonds. The government isn't selling paper bonds as of January 1, 2012, and you buy electronic EE bonds for their face value. I feel like that takes some of the fun out of it. Oh well.

I spent about an hour inputting the information (issue date, face value, etc.) on my bonds into TreasuryDirect's bond calculator. That gave me a spreadsheet with a whole bunch of information, like the issue price, the accrued interest, the final maturity, and the interest rate. From that I learned something interesting: before May 1995, the interest rate for EE bonds was 4% going back to March 1987 (the earliest-issued bond I have). Starting in May 1995, interest rates are much lower, from 0.76% to 1.19% up through my latest bond, issued in January 2002.

The total value of my bonds as of July 2012 was $5,110.49. Of that, $1,264.85 was earning a low interest rate, and the remaining $3,845.64 is earning 4%. I say "was earning" because I cashed all my low interest bonds. I've got 6% student loan debt to pay down, after all. I should mention here how easy it was to cash my bonds at my local bank. After signing the back of each, the teller handled the deposit for me, and the cash was in my account right away, available for withdrawal on the next business day. I thought I'd have to wait for something to clear. That was a pleasant surprise.

I figure I should talk about why I haven't cashed my remaining bonds (and why I plan on holding them to maturity). One consideration is that cashing bonds triggers a tax event. Interest income on federal savings bonds is taxed as regular income. If I cashed out all my bonds and paid down my debt, I wouldn't be reducing my debt by the sum total of my bonds' value: whatever tax refund I'd get (if any) would be reduced by some amount. (Since there's no way I'll be debt-free before tax day I plan on using my entire refund on debt paydown.) I'm not sure if it's irrational but that course of action seemed bad to me.

Here's the big reason I want to hold my 4% bonds for as long as possible: I consider it insanely awesome that the government has to pay me 4% interest. Interest rates have been low for over a decade, and for basically my entire adult life. Here I have these relics of a bygone financial era paying me a risk-free 4%. At the time of this writing my ING savings account rate is 0.8%. I would feel absolutely awful giving up a risk-free 4% return, even if it means eliminating debt at 6%. I might be able to justify this based on the difference in maturities for my student loans and the bonds — maybe not, I haven't thought about it too hard. I do know that if today a magical elf offered me an unlimited number of government-backed 30-year-maturity bonds at 4%, I would use all my available cash buying them.

So where does that put me? I've got the $1200 from my bonds, $1k in my checking from the last time I got paid, and another $1200 repaid from when I lent it on a short-term basis to a family member in need. Combine that cash with this week's impending pay day and an outstanding balance of a little over $16,600, and I'm planning on entering September with just over $12k in student loans.

1 comment:

  1. I have an EE bond from the late 80s paying over 4% interest and decided to let it grow. Great point about the tax event. That is easy to overlook.